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Lessons About Corporate Governance from Venture Capital-Backed Companies
by Professor Rob Johnson
Directors of corporate boards can learn something about corporate governance from observing how the boards of venture capital-backed companies operate. Venture capitalists have to focus intensely on the things that will make the most difference in creating value because so few start-ups actually succeed. Only with the proper focus by their company boards on building value can they nurture the winners that will ultimately make the difference in a successful venture capital portfolio.
To put this in perspective, one must first define the board of directors’ key responsibilities. As Geoff Unwin, board director of several listed companies, suggests, the role of the board is three-fold: (1) to protect the values of the company through good governance; (2) to ensure that the company has the right strategy; and (3) to ensure that the CEO and executive team is the right team to execute that strategy. Yet boards often get so involved in dealing with regulatory issues and financial matters that they overlook, or simply don't find the time, to focus on some of the key matters implicit in Unwin's definition.
In venture capital-backed companies, however, this problem is less prevalent – not because those same issues don't exist, but because the scope of corporate governance in such companies is inherently much more focused. Of course, it helps that boards of venture-backed companies are representing just one shareholder or a small handful of shareholders and are not forced by public markets to focus on short-term results. Yet there is more to it than that.
As a rule, in a start-up or early-stage company, venture capitalists back the entrepreneur as much as the business idea. It is often said that given a choice between a grade A business idea with a grade B entrepreneur or a grade B business idea with a grade A entrepreneur, the experienced venture capitalist will almost always choose the latter. This means that, from the start, the venture capitalist has already made a judgment about the third element in Unwin's formula – backing the right entrepreneur to lead the company. In many instances, the board will need to spend time ensuring that the CEO has the right supporting team, but the leadership is set early on.
Addressing Unwin's first point, the values of a start-up or early-stage company are a direct reflection of the values of the founder/CEO. Think Steve Jobs or Jeff Bezos or Elon Musk. Thus, as long as the other directors agree that those values are sound, the congruity between the founder/CEO and the rest of the board provides a sound basis for dealing with governance matters, which is a huge step forward for any board.
That then leaves the second element – the right strategy – for the board to focus the majority of its energies on. And, indeed, that is where boards of venture-backed companies spend the most time. Of course, situations change and boards must continuously assess and deal with issues that affect each of Unwin's three planks, including those instances when the management challenges of sustaining high growth mean that a founder is no longer the right person to continue leading the company. Nonetheless, after dealing with such issues, the main focus of the venture-backed board ultimately always returns to the important strategic issues. The quality of the strategy discussions at the board level is key.
Rob Johnson
Visiting Professor of Strategic Management
IESE Business School
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